Winter 2009 - (Real Estate Brief Winter 2009)

Real Estate Brief Winter 2009

Introduction

It is not uncommon in a commercial lease situ­ation to have to determine whether a tenant has the right and/or obligation to remove an item from the premises at the end of the term of the lease. The common law provides some rules that can be (and most often are) supplemented by lease terms. This issue was recently addressed by the Ontario Superior Court of Justice in Clemmer Steelcraft Technologies Inc. v. Bangor Metals Corp., Bangor Metals Inc. and Northgate Properties Inc., 2008 CanLII 46320 (ON S.C.).

General Principles

The items within a leased premises typically fall into one of two categories:

1. Chattels: A chattel (also described as personal property) is a moveable item of property that is neither land nor permanently attached to land or a building.

2. Fixtures: A fixture is considered part of the real estate (lands and building). The case law (particularly Stack v. T. Eaton Co. (1902), 4 O.L.R. 335) has provided fairly clear guidance as to when an item becomes a fixture. The rules include:

(i) articles not attached to the real estate other than by their own weight are not to be considered as part of the real estate, unless the circumstances are such as to show that they were intended to be part of the real estate;

(ii) articles affixed to the real estate even slightly are to be considered as part of the real estate unless the circumstances are such as to show that they were intended to continue as chattels;

(iii) the circumstances necessary to alter the prima facie character of the items as determined in accordance with the above must be obvious for all to see; and

(iv) the intention of the person affixing the article to the land is material only so far as it can be presumed from the circumstances of the annexation.

Chattels tend to be obvious and are not often a matter of dispute between the landlord and the tenant. On the other hand, fixtures can be an issue as the fixtures category itself has two components in the lease context. Fixtures may be either true fixtures (or leasehold improvements) or trade fixtures (also known as tenant fixtures). True fixtures are items that have been fastened or annexed to the real property. The tenant has no common law right to remove true fixtures. Trade fixtures are fixtures that, while affixed to the land, are particular to the tenant's business or trade. While considered a fixture and therefore part of the land, as between the tenant and the landlord the tenant has the right at common law to remove trade fixtures at the end of the term.

Most sophisticated commercial leases will supplement the common law rules. For example, a fixture (leasehold improvement) that is not a trade fixture would, in the absence of a specific lease term, remain on the premises after the lease ends. Many landlords try to reserve the right to require the tenant to remove its leasehold improvements and this is commonly a negotiated point. Commercial leases also often obligate the tenant (as opposed to giving it the right) to remove its trade fixtures. In the Clemmer Steelcraft case trade fixtures were dealt with in a different manner.

Clemmer Steelcraft Case

In this case, the Tenant leased the premises for the purpose of designing, manufacturing and assembling large component pieces of heavy equipment. The Tenant installed a large spray booth and racking for use in its business.

During the term of the lease, the Tenant entered an Asset Purchase Agreement (the "APA") with Clemmer Steelcraft Technologies Inc. ("Clemmer") whereby the Tenant sold its assets (including the spray booth) to Clemmer on an "as is, where is" basis without any representation as to title to the assets.

After the APA had closed, the President of the Tenant corporation informed Clemmer that it believed the spray booth was the property of the Landlord. When Clemmer notified the Tenant that it wished to remove the spray booth, it discovered that a new lease had been made for the premises between the Landlord and a new corporation related to the Tenant. One of the reasons for the new lease was the use of the spray booth in the premises.

The new tenant (supported by the Landlord) took the position that the spray booth and racking were the property of the Landlord and could not be removed by Clemmer. Clemmer contended that the spray booth and racking were trade fixtures that could be removed.

The spray booth was 20 feet wide, 45 feet long and 20 feet high. It was fastened to the floor, the roof and the structural steel, as well as being connected to the electrical system and natural gas supply line. Any dismantling of the spray booth would have been expensive and would have caused damage to the walls and facility floor. The cost of its removal along with the necessary remediation of the facility may have exceeded its value.

After reviewing the common law principles on distinguishing between chattels and fixtures, Justice New­bould concluded that the spray booth was a trade or tenant's fixture that could be removed but for the terms of the lease. However, the language of the lease between the Landlord and Tenant governed the result in this case.

The lease provided at Section 21 that:

All… Leasehold Improvements and fixtures upon the Demised Premises and which in any manner are or shall be attached to the floors, walls, ceiling or roof of the Demised Premises shall, upon the Commencement Date, become the sole property of the Landlord and, for purposes of greater certainty, provided that the Tenant shall be entitled to remove any fixtures or other Leasehold Improvements at or after the expiry or termination of this Lease in the Landlord's and Tenant's agreed discretion, and shall repair any damage occasioned by such installation or removal.

Section 21 was a standard form clause which originally contained an exception for trade or tenant's fixtures that were to be listed in a schedule to the lease. That exception was struck out by the parties and the schedule was intentionally left blank.

Justice Newbould concluded that Section 21 in the lease made clear that fixtures attached to the premises, which included the spray booth and the racking, were the property of the Landlord and could only be removed by the Tenant with the Landlord's permission (which was refused in this case). This reversed the common law position. Accordingly, Clemmer's motion was dismissed.

Conclusion

Although the Clemmer Steelcraft case has somewhat unique circumstances (in that the Landlord and the Tenant are arguing for the same result and it is not a dispute in respect of obligations at the end of the term) it does serve to demonstrate that the terms of the lease will dictate whether a tenant is entitled to remove its trade fixtures. A tenant may incorrect­ly believe it can remove all items particular to its specific business. Landlords and tenants need to give careful consideration to tenant improvement, removal and restoration clauses at the drafting stage.